Recent Update

Sunday, May 17, 2020

The HINDU Notes – 17th May 2020

📰Coal, mineral reforms to help reduce imports

Coal sector will get a boost as private parties can now bid for 50 blocks: CARE Ratings

•Finance Minister Nirmala Sitharaman’s structural reform measures in the coal and mining sector are expected to give a boost to private investments in the sector and reduce India’s reliance on imports.

•“Our assessment is that if it is implemented at the earliest, these much needed reforms will double these sectors’ contribution to the GDP,” Ajay Kapur, CEO - Aluminium & Power Business, Vedanta Ltd., said.

•Saurabh Bhatnagar, partner and national leader, Metals & Mining, EY India said, “The introduction of competition, transparency and private sector participation in the coal sector will automatically build transparency of mine valuations, force rigorous mine planning and compliance, and invite investments for enhancing operational efficiency to justify the bids made at the time of mine acquisition. These were much-needed reforms in the mining sector as India is a mineral rich country and any sectoral reforms to attract investments which adds to India’s GDP through this sector and save precious foreign exchange are welcome.” According to CARE Ratings, the coal sector gets a boost as the private sector can now bid at the auctions for 50 blocks, enhancing supplies, reducing imports, which is good for the economy. The government also plans to auction Coal Bed Methane (CBM) blocks.

•Tirtha Biswas, programme lead at Council on Energy, Environment and Water (CEEW) said, “The Government of India’s big plan to push coal gasification to replace natural gas in the fertiliser sector would help square energy and food security objectives. However, ammonia produced from coal gasification has a carbon footprint that is 1.8 times higher than that produced from the conventional process using natural gas. This could potentially offset the emissions intensity reductions achieved through investments in renewables.”

•“Elimination of distinction between captive mines and non-captive will ensure a level playing field for players in the integrated metals space,” Mr. Bhatnagar said.

📰Govt. throws open defence production and coal sectors

•Steps to indigenise defence production by banning the import of some weapons and platforms while hiking foreign direct investment into the sector were among the highlights of the fourth tranche of the Aatmanirbhar Bharat Abhiyan package, which seemed to focus more on industry reforms than any sort of economic stimulus.

•“Many sectors need policy simplification. Once we decongest sectors, we can also provide the necessary boost for growth and employment,” Ms. Sitharaman said, noting that structural reforms were the focus of Saturday’s announcements.

•“These sectors with these reforms are going to be the new horizon for growth and, therefore, we see great potential in more investments which can be drawn with the reforms that we are announcing today. More production can be clearly marked, and certainly it will lead to a lot more employment possibilities,” she said.

•Most industry groups welcomed the package, although some in the space sector said the measures to boost private participation had to go beyond mere intent. However, labour unions across the ideological spectrum, including the RSS-based Bharatiya Mazdoor Sangh, slammed the reform measures.

•“This was less of a stimulus and more of industrial reforms, which could have been announced at any time. They have used this crisis time to utilise the ordinance route or other ways to fast-track industrial reforms, which would have faced resistance otherwise,” said Ernst and Young’s chief policy adviser D.K. Srivastava, who is also a member of the Advisory Council to the 15th Finance Commission.

•“The sectors covered are of strategic importance but these policies will be rolled out over a 3-6 month period, and any implication for supporting or reviving the economy as it comes out of lockdown is missing,” he said.

📰India opposes rejoining RCEP over China concerns

MEA official flags ‘overdependence’

•As the deadline for a response to a fresh proposal of India rejoining negotiations on the ASEAN-led trade Regional Comprehensive Economic Partnership (RCEP) ran out on Friday, a senior Ministry of External Affairs (MEA) official indicated that global post-COVID-19 concerns over China had strengthened India’s opposition to the grouping.

•“If anything the COVID-19 experience and the experience of countries that have been overly dependent on imports from China or one country would have reinforced and revalidated the decision to stay out of the RCEP,” said Ashok Malik, policy adviser in the MEA.

•The letter sent by the RCEP’s Trade Negotiating Committee (TNC) Chairperson last month, had an offer to reconsider India’s objections to giving market access for a “limited number of products”, if it would rejoin the talks.

•Prime Minister Narendra Modi had announced India’s decision to quit the grouping, which includes the 10 ASEAN nations, Australia, China, Japan, New Zealand and South Korea in November, citing lack of protection for country’s agricultural sector among others.

•After pulling out of the grouping, India skipped at least two separate meetings it was invited to, including one in Bali in February, and a virtual meeting in April. At the April RCEP-TNC meeting , negotiators who ironed out legal issues with the pact committed to signing the agreement by the end of 2020.

•“The RCEP will provide a more stable and predictable economic environment to support the much-needed recovery of trade and investment in the region, which has been adversely affected by the COVID-19 pandemic,” said a statement issued on April 30, which added that “Against this backdrop, the 15 [countries] reaffirmed their commitment to continue working with India to address its outstanding issues…[and] would welcome India’s return to the RCEP negotiations.”

•However, Mr. Malik said India’s experience of trade pacts in the past was that they had “hollowed out” manufacturing in the country, and would hamper the government’s renewed commitment to the ‘Make in India’ policy. “At a time when our ‘Make in India’ programme is moving from Level 1 to Level 2, and it has to go to Level 10, I think it was a good decision [to leave RCEP],” he said, speaking at a web seminar organised by the Carnegie India Foundation.

•Significantly, Australian High Commissioner-Designate Barry O’Farrell cited the ‘Make in India’ policy as the reason for India to join. Australia and Japan have been at the forefront of efforts to convince India to rejoin the RCEP as a possible counterweight to China in the grouping that would represent a third of global trade.

•“If India did want to rejoin the [RCEP] negotiations, there would be no better time than now, because it would send a signal to the world that not only is India an attractive place to invest, but also, its potential of being a global manufacturing hub as envisaged by the government’s ‘Make in India’ policy was realisable” Mr. O’Farrell said.

📰Domestic defence procurement gets separate budget provision

Govt. to bring out negative import list for weapons and military platforms

•The government would make a separate budgetary provision for domestic defence procurements and bring out a negative import list for weapons and military platforms, Finance Minister Nirmala Sitharaman announced on Saturday as part of efforts to promote indigenous manufacturing and reduce the defence import bill.

•“We shall notify a list of weapons and platforms not allowed for import. They will have to be bought in India. Every year, this list will be increased as the capacity to make weapons that meet the necessary standards grows. Indigenisation of some imported spares will also be given priority,” she said, while stressing that ‘Make in India’ was absolutely necessary for self-reliance, especially in critical sectors such as defence production.

•While some of the state of the art weapons required by the Services would be met through imports, some that were produced in the country and met the standards have to be procured locally only. The negative list would be worked out in consultation with the Department of Military Affairs headed by the Chief of the Defence Staff.

•Ms. Sitharaman said the separate budget provision for domestic capital procurement would help reduce the defence import bill and encourage domestic manufacture.

•The limit for Foreign Direct Investment (FDI) in defence through the automatic route had also been raised from 49% to 74%. Earlier, 100% FDI was allowed on a case by case basis.

•However, two industry observers said the real impact of the increased FDI limit had to be analysed.

Corporatisation of OFB

•Ms. Sitharaman also announced a long pending proposal of corporatisation of the Ordnance Factory Board (OFB) for autonomy, efficiency and accountability. While clarifying that it would not be privatised, she said the ordnance factories would eventually be listed on the stock market to improve transparency.

•Late last year, the Defence Ministry set up a high-level committee to examine the aspects of corporatisation of the OFB and work out the modalities. The Kolkata-headquartered OFB, with 41 factories spread across the country, functions as a department under the Department of Defence Production.

•The Finance Minister said a time-bound defence procurement process and faster decision-making would be brought in by setting up a Project Management Unit (PMU) to support contract management, “realistic setting” of General Staff Qualitative Requirements (GSQRs) of weapons and platforms and overhauling the trial and testing procedures.

•Stressing on realistic GSQRs, Ms. Sitharaman said “sometimes unrealistic quality requirements are established” and quite a lot of time was spent on searching for suppliers who met all those requirements and the whole process repeated after a single vendor situation, which was not allowed.

•Separately, a revision of the Defence Procurement Procedure (DPP) was on and a draft put in public domain for feedback before finalisation.

Much needed step

•The Confederation of Indian Industry (CII) called the measures a much needed step for reducing imports and building self-reliance in defence. “The stress laid on domestic manufacturing is very encouraging as India today is among the largest importers in the world of defence equipment. The list of non-importable items and corporatisation of OFB are some landmark steps and will boost the confidence of domestic manufacturers,” CII Director General Chandrajit Banerjee said in a statement.

•The increase in FDI limit to 74% would attract foreign funds into this sector, along with technology infusion, he added.

📰Will migrants benefit from the Centre’s measures?

What role will State governments play? How will the National Rural Employment Guarantee Scheme help?

•The story so far: In her second tranche of COVID-19 relief package announcements, Finance Minister Nirmala Sitharaman announced the steps taken by the government for migrants and farmers during the national lockdown, including free ration for stranded workers. Acknowledging the significance of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) during the pandemic, she said it had helped provide jobs to returning workers in rural areas and advised States to continue the process in the monsoon season as well. Migrant workers, the urban poor and small farmers are the targeted beneficiaries of these announcements.

Why and how have migrant workers suffered during the lockdown?

•One of the most severely affected sections of the population due to the extended lockdown has been migrant workers, especially those in urban areas across the country. The recent Periodic Labour Force Survey conducted in 2017 by the National Sample Survey Office of the Ministry of Statistics and Programme Implementation, had estimated that there were around 1,49,53,750 urban workers who had vulnerable jobs. These workers included helpers in a household enterprise and who did not receive a regular salary and casual labourers who received daily wages; besides this, the number considers only those in the bottom 50% of the wealth pyramid in 2017-18, based on their monthly per capita expenditure. This number extended to an estimated 2.5 crore people if those who had salaried jobs but did not receive any paid leave and other benefits were included. Migrant workers numbered more than 81 lakh people among this segment.

•Once the national lockdown was announced, it was this segment of the population which was hurt the most as many of them lost their jobs (the Centre for Monitoring Indian Economy, or CMIE, estimates unemployment to have reached 24.2%, with urban unemployment being 26%) and had barely any income to tide over the lockdown. Many migrant workers sought to return home to their home towns, but the absence of transport prevented them from doing so. State governments were supposed to set up relief camps and shelters providing food and other amenities for these workers, but implementation was skewed (69% of the overall shelters and camps were situated only in Kerala, according to an affidavit submitted by the Union government to the Supreme Court in early April).

•With increasing distress, many migrant workers took recourse to their own means of transport to go home — many had no other option but to walk long distances — before the central government finally notified the start of services of “Shramik trains” to transport them. Migrant workers have continued to travel to escape distress conditions at their places of work and in the absence of any social security net.

What has been announced for migrant workers?

•The Finance Minister acknowledged the significance of the MGNREGS in providing jobs to workers returning to rural areas. The government noted that work off-take increased in May. This followed instructions from the Centre to restart the scheme after work hours fell drastically in April. The Centre has now advised States/Union Territories to provide work through the scheme and to extend this to the monsoon season as well in providing jobs in plantations, horticulture, livestock-related work. The CMIE’s latest unemployment survey report also found that while various segments (small traders, salaried employees, entrepreneurs, etc) have suffered significant job losses, the number of farmers in the survey had increased, indicating that farm work has been a source of livelihood during the lockdown.

•The government has promised a free supply of 5 kg of foodgrain per person and 1 kg channa per family per month for two months, for those migrants who are neither beneficiaries of the National Food Security Act (2013), or NFSA, nor possess State cards. The government expects eight crore migrants to benefit from this scheme and the Centre will spend Rs. 3,500 crore on this. States will be in charge of implementation and distribution. The inclusion of these estimated eight crore beneficiaries will bring the total number of people under the Public Distribution System coverage close to the level legally mandated by the NFSA of 67% of the population. Food Minister Ram Vilas Paswan has said that if the number exceeds eight crore, the Centre is ready to provide additional foodgrain for free supply but it would leave it to States to identify genuine beneficiaries. “States can directly supply free ration at shelter camps, or issue distress coupons or adopt any suitable method for free distribution of the food grains and channa ,” Food Secretary Sudhanshu Pandey clarified at a briefing on Saturday.

What about the One Nation One Ration Card scheme?

•The Centre has also said that the One Nation One Ration Card scheme will be enhanced by assuring national portability of 83% by August 2020 and 100% by March 2021. The scheme should allow migrant workers to access food in States other than that of their permanent residence. But concerns remain about availability of ration in shops to allow for distribution to migrant workers as well. In places where the scheme has been implemented so far, the utilisation of the scheme has been very low (800 workers on an average in a month before the lockdown and an average of only 200 workers during the lockdown).

•Besides these steps for immediate relief to the workers, the government has also announced that it will launch a scheme under the Pradhan Mantri Awas Yojana (PMAY) to convert government funded housing in the cities into affordable rental housing complexes under PPP mode through a concessionaire.

•A special credit facility with liquidity of up to Rs. 5,000 crore has been announced for street vendors through a special scheme that will facilitate easy credit and will be launched in a month.

Will small farmers benefit?

•Among steps announced to ease credit for small farmers, the government said that the National Bank for Agriculture and Rural Development (NABARD) will extend an additional refinance support of Rs. 30,000 crore for crop loan requirement of rural cooperative banks and regional rural banks.

📰Reforms and agriculture

What are the measures announced by the government to deal withthe farm crisis across the country?

•The story so far: With mandi closures and supply chain disruptions causing havoc in agricultural marketing, the COVID-19 pandemic has put a spotlight on some of the critical infrastructure gaps and long-pending governance issues that plague the farm sector. The third tranche of the Atmanirbhar Bharat Abhiyan listed measures to deal with those gaps, though there has been no announcement on an immediate economic stimulus for the sector.

What are the reforms announced in the farm sector?

•The third tranche announced on Friday focused on long-term issues in the agricultural sector, by promising financing to strengthen infrastructure, build better logistics and ramp up storage capacities, as well as proposing three major governance and administrative reforms that have been in the pipeline for many years.

•Finance Minister Nirmala Sitharaman’s rationale for the third tranche was that improving farmers’ income needed such long-term investments and changes, rather than a focus on short-term crop loans.

•However, a number of farmers and activists said that in the light of the COVID-19 crisis, immediate support and relief in the form of cash transfers, loan waivers, and compensation for unsold produce should have come before long-term reforms.

How will they change the agriculture sector?

•Taking the opportunity of a crisis situation, the Finance Minister has pushed through reforms that the Centre has been trying to implement for years.

•For instance, the Essential Commodities Act, 1955 came into being at a time of food scarcity and famine; last year’s Economic Survey called it an “anachronistic legislation”. It allows the government to control price rise and inflation by imposing stock limits and movement restrictions on commodities, giving States the power to regulate dealer licensing, confiscate stock and even jail traders who fail to comply with restrictions. Earlier this year, it was used to control soaring onion prices.

•Traders have long complained of harassment under the Act on the suspicion of hoarding, black marketing and speculation, while food processors and exporters have also pointed out that they may need to stock commodities for longer periods of time. The Act has disincentivised construction of storage capacity and hindered farm exports.

•Discussions about amending or repealing the Act have been going on for almost two decades. On Friday, the Finance Minister announced that the Act would be amended to deregulate six categories of agricultural foodstuffs: cereals, pulses, edible oils, oilseeds, potato and onion. Stock limits on these commodities will not be imposed except in times of a national calamity or a famine, and will not be imposed at all on food processors or value chain participants, which/who will be allowed to store as much as allowed by their installed capacity. Exporters will also be exempted.

•It is hoped that the amendment will bring more private investment into warehouses and post-harvest agricultural infrastructure, including processors, mills and cold chain storage. It could help farmers sell their produce at more competitive rates if there is no fear of government intervention to artificially suppress market prices, and is likely to give a boost to farm exports.

What about the other planned reforms?

•The Centre plans to bring in a new federal law to break the nearly half-century long monopoly of the Agricultural Produce Market Committee (APMC) mandis . It has already tried the route of trying to coax State governments into adopting its Model APMC Amendment Act which aims at developing unified State-level markets by offering a State-wide licence and single point levy of market fees while also allowing private markets, direct marketing, ad hoc wholesale buying and e-trading.

•However, only a few large States ruled by the Bharatiya Janata Party, including Gujarat and Madhya Pradesh, have amended their Acts. Now, the Centre proposes to bypass States altogether by bringing in a federal law to abolish inter-State trade barriers.

•The hope is that these reforms will bring in more options for the farmer, offering more competitive prices if there is a wider choice of buyers. The plan to bring in a legal framework for contract farming also aims to provide more certainty and choice for farmers, although some experts caution that recent drafts of contract farming law promote the interests of the large corporate player at the expense of safeguarding the small farmer.

How are infrastructure investments expected to help?

•Reforming governance structures is of no use unless there is infrastructure on the ground to enable farmers to take advantage of the wider choices with which they are being provided. A Rs. 1-lakh crore agriculture infrastructure fund run by the National Bank for Agriculture and Rural Development will help create affordable and financially viable post-harvest management infrastructure at the farm gate and aggregation points.

•The Finance Minister emphasises that her announcements would also bring better infrastructure and logistics support to fish workers, dairy and other livestock farmers, beekeepers and vegetable and medicinal plant growers.

•She also offered support to lakhs of small informal food processors, mostly women, who need technical upgradation and marketing support in order to compete in a changing marketplace.

📰How will the COVID-19 relief for MSMEs help?

Will micro, small and medium enterprises be able to kickstart their businesses? How do the proposals make it easier for banks to lend?

•The story so far: In his address to the nation on May 12, Prime Minister Narendra Modi announced a Rs. 20-lakh crore economic relief package titled Atmanirbhar Bharat Abhiyan. The relief package is being unveiled in tranches (from May 13) by Finance Minister Nirmala Sitharaman. The first tranche, aimed at micro, small and medium enterprises (MSMEs), non-banking financial companies (NBFCs) and at some individuals was announced by her on Wednesday.

What are the proposals aimed at offering relief to micro, small and medium enterprises (MSMEs)?

•The government has proposed to offer collateral-free loans to MSMEs which will be fully guaranteed by the Centre. There will be a principal repayment moratorium for 12 months and the interest rate will be capped and there will be no guarantee fee.

•All MSMEs with a turnover of up to Rs. 100 crore and with outstanding credit of up to Rs. 25 crore will be eligible to borrow up to 20% of their total outstanding credit as on February 29, 2020. These loans will have a four-year tenure and the scheme will be open until October 31. A total of Rs. 3-lakh crore has been allocated for this.

How will this benefit MSMEs?

•This will act as initial seed money for these small enterprises hit by zero cash flow due to the national lockdown. This loan will help them buy raw materials, pay initial bills and daily wages to employees. In short, this will be like working capital for cranking up their businesses again.

•Banks, though flush with funds, have been unwilling to lend to this category of borrowers as they fear that the money will not be repaid. These small businesses have also pledged all their assets already for other loans and do not have any more assets to pledge.

•It is to break this logjam that the government has said that it will backstop banks up to Rs. 3-lakh crore and said that these loans do not need collaterals. Banks are now expected to be more comfortable in assisting this category of borrowers because the risk is zero (since the loans are guaranteed by the central government).

•This is the single biggest proposal in the last three tranches of announcements under the Atmanirbhar Bharat Abhiyan and small businesses are expected to benefit from this in a big way. About 45 lakh MSMEs are expected to gain from this proposal.

Are these the only proposals for MSMEs?

•No. A partial credit guarantee scheme has been extended to enable promoters of these units to increase their equity. A total of Rs. 20,000 crore will be funnelled through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) whereby banks will lend money to promoters which can be infused as equity in their businesses. About two lakh stressed MSMEs with non-performing assets (NPAs) are projected to benefit from this. The CGTMSE will offer a partial credit guarantee to banks.

•There is also a proposal to infuse equity into MSMEs through a Fund of funds system where the government will provide Rs. 10,000 crore as initial corpus of the Fund. This will be leveraged to raise Rs. 50,000 crore which will be used to support MSMEs in desperate need of equity through ‘daughter funds’ of the main Fund of funds. The aim is to expand size and capacity of the MSMEs with equity and help them get listed on the stock exchanges.

Was not a change in the definition of MSMEs also announced?

•Yes, henceforth MSMEs will be defined not based on their investment alone but also on their turnover. The definition has been tweaked and the existing distinction between manufacturing and services units has been eliminated.

•Henceforth, a unit with up to Rs. 1 crore investment and Rs. 5 crore turnover will qualify as a micro unit, investment up to Rs. 10 crore and turnover up to Rs. 50 crore will qualify as a small unit, and investment up to Rs. 20 crore and turnover up to Rs. 100 crore will qualify as a medium enterprise. It has been a long-standing demand from industry to hike the investment limits, as with inflation, units often cross the threshold that will bring them benefits. To prevent this, they either run their operations at a reduced level or incorporate multiple units so that turnover is distributed in a way that they remain within the threshold that will give them the benefits. The decision to add turnover criteria to investment is seen as a good decision as there are units that leverage a small capital to post large revenues.

What are the proposals for non-banking financial companies (NBFCs)?

•NBFCs, housing finance companies and micro finance institutions are finding it difficult to raise debt capital due to a confidence crisis in the debt markets. The government has, therefore, announced a special liquidity scheme of Rs. 30,000 crore to pick up investment grade debt paper from both primary and secondary markets. Such paper will be fully guaranteed by the government. This is expected to break the low confidence cycle in the market for lending to the above category of borrowers.

•In addition, to help low rated finance companies to raise debt, the existing partial credit guarantee scheme has been extended to cover primary market debt paper wherein the first 20% loss will be borne by the government.

•A total of Rs. 45,000 crore has been set aside for this Partial Credit Guarantee Scheme 2.0 that will offer liquidity to paper rated AA and below and even unrated paper.

Do electricity distribution companies (discoms) also feature in the first tranche announced?

•Yes, discoms are in a huge liquidity crisis and unable to pay their dues to electricity generation companies. Their cash flow and revenues have been hit due to low demand from industrial consumers for power during the lockdown. The various State discoms together owe about Rs. 94,000 crore to their suppliers, the generation and transmission companies.

•The government, through Power Finance Corporation-Rural Electrification Corporation, will infuse liquidity of Rs. 90,000 crore to discoms which will be securitised against their receivables from consumers. The loans given for the purpose of discharging their dues to generation companies will be against a guarantee from the respective State related to the discom. This emergency liquidity infusion will avert a crisis where generation and transmission companies stop supplies to discoms that are in default.

What are the measures for the common man?

•In March, when the first relief package called the Pradhan Mantri Garib Kalyan Yojana was announced, the government offered to pay the 24% provident fund contribution (employer+employee) for those earning up to Rs. 15,000 a month as salary and working in units that employ less than 100 workers for three months. This has now been extended for another three months up to August. The statutory PF contribution for those employed in the private sector (and not in the category of establishments above) has been reduced to 10% (from 12% now) for the next three months in order to increase liquidity in their hands. This is expected to benefit 4.3 crore people and 6.5 lakh establishments and release a total of Rs. 6,750 crore liquidity.

•In addition to the above, the rate of tax deducted at source (TDS) and tax collected at source (TCS) has been reduced by 25% for a whole range of receipts. Thus, in payments to contractors, professional fees, rent, interest, commission, brokerage, etc. the TDS will be 25% lower. The TCS paid while buying a car of over Rs. 10 lakh in value and TCS collected in property transactions will also be lower.

•The lower TDS is not applicable on monthly salaries that employees receive.

•In the cases where TDS/TCS has been reduced, the tax liability is not reduced. It will be payable while filing return or while paying advance tax. The idea is only to offer immediate cash relief to people. The lower TDS/TCS kicks in right away and will stay until March 31, 2021.